Midyear Retail Market Overview 2017

RETAIL MARKET OVERVIEW

As we edge closer to the second half of 2017, the Tucson Retail Market is continuing to maintain its momentum that started about two years ago. According to CoStar, the first quarter of 2017 saw a positive net absorption of approximately 235,808 square feet. A total of nine retail buildings with approximately 235,958 square feet were delivered to the market with 183,369 square feet still under construction. This was in comparison to the fourth quarter of 2016 which had a positive net absorption of approximately 39,832 square feet.

According to the Pima County Research Council, in the fourth quarter there were 337,691 square feet of retail space under construction. The first quarter of 2017 had approximately 295,548 square feet of retail under construction. Expect more of the same during the second half of 2017. I don’t think retail development will be like it was before 2007, but it will continue to show stable growth.

The current retail vacancy rate according to the Pima County Research Council is approximately 6.4 percent which, by the way, is what I predicted in my February 9 Market Review. Quoted retail lease asking rates are averaging $14.81 per square foot NNN.

The largest sales transaction so far in 2017 was the sale of the 53,678 square-foot Cinemark at Tucson Marketplace at the Bridges, located at 1300 E. Tucson Marketplace Blvd. The purchase price was $15,548,792 ($289.67 per square foot). The Seller was Eastbourne Investments Ltd., LLC, of Williamsville, New York, and the Buyer was Spirit Realty Capital of Dallas, Texas. The largest lease signing so far this year is the 52,566 square foot former grocery store space leased to U-Haul located at the southeast corner of Broadway/Camino Seco. Expect to see more of these self storage facilities going into obsolete retail centers.

In my opinion, there continues to be more optimism within the Tucson Retail Market. New companies relocating to Tucson and many existing companies have announced their expansion plans in the Tucson area. With these announcements, retailers are looking to increase their presence in Pima County.

In Tucson, urban infill is still where most of the action is. New retail developments are being built where old, obsolete retail properties used to be. As you drive on our major streets like Broadway Blvd. near Park Place Mall and Grant Road in central Tucson, you will see this repurposing and/or assembling of older retail properties. This trend will continue in the midtown area, which still has an overabundance of obsolete retail properties.

A Hooters Restaurant recently opened at Circle Plaza, a Larsen Baker development, on a pad site where Play It Again Sports used to be. A new Bealls Outlet has opened there as well, taking about 50 percent of the former Sports Authority space.

Older retail stores west of and across the street from Longhorn Steakhouse on E. Broadway are being assembled and scrapped. They will be replaced by new retail space. The former 32,000 square-foot Copper Country Antique building at the northwest corner of Broadway/Rosemont purchased by Larsen Baker will soon be remodeled and repurposed.

This year we have also started to see new retail developments being announced in the outlying areas of Tucson. TJ Maxx, Ross and Petco are currently under construction at Houghton Town Center in the Rita Ranch area next to the Wal-Mart with a lineup similar to the Arizona Pavillions at I-10/Cortaro Road in Marana. They are expected to open in late summer. New retail developments have also been announced in Vail, Catalina, and Sahuarita.

This redevelopment and demolition of older retail properties in central Tucson has been a good thing. There is too much obsolete retail space in Tucson’s central core. Property assemblages have and will continue to take these older, smaller retail spaces off the market and replace them with newer product and stronger retail tenants. Larsen Baker revitalized their previously mentioned Circle Plaza Shopping Center at Broadway/Kolb by adding Natural Grocers, a Hooters restaurant and Bealls. Amphi Plaza at Ft. Lowell and 1st Avenue now has a new Wal-Mart Neighborhood Market. We need more of this type of redevelopment throughout the Tucson area as it strengthens the retail market while helping give Tucson a much-needed facelift of its urban core.

New Developments

As mentioned, a new 42,000 square-foot Wal-Mart Neighborhood Market is now open at Amphi Plaza located at the northeast corner of Ft. Lowell and 1st Ave. Approximately 60,000 square feet of old retail space was scrapped for this new market.

The former Grant Road Lumber company was bladed and is being replaced by The Yard, an approximately 20,000 square-foot restaurant currently under construction and being developed by the Sam Fox’s Restaurant Group. The restaurant is expected to open later this summer.

The Bridges at I-10 & Kino keeps adding new tenants. A 14-screen 57,000 square-foot Cinemark movie theater opened late last year. An approximately 25,000 square-foot Planet Fitness and a 30,000 square-foot Dave & Busters opened this year at The Bridges.

A 100,000 square-foot Fry’s super store opened late last year on Valencia Road in Midvale Park. It is now the number one Fry’s store in the Tucson area! Starbucks is on the hard corner, and 10,000 square feet of shop space is almost all leased up. That was the first new Fry’s store to open in Tucson in over 10 years.

On the northwest side at I-10 & Twin Peaks Road, the 360,000 square-foot Tucson Premium Outlets developed by Simon Development is on a roll, with sales above projections and trending better than their Chandler outlet mall. A four-story Hampton Inn is expected to break ground there in the next few months. Expect an auto mall to be developed at that intersection in the next year.

Even with all the new companies moving into Pima County, anchor tenants are still being very cautious about opening new stores in the outlying areas of Tucson. The words you will hear most often are “phasing in”, as developers and their bankers both want anchor tenants signed up and under construction before they allow the developers to start constructing their shop space. Anchor tenants and savvy developers want to see actual rooftops and not “rooftop projections” before moving forward to develop suburban sites.

A good example of this cautious approach is the Wal-Mart anchored 60-acre Houghton Town Center in Vail. The developer, Diamond Ventures, started out with just a freestanding Wal-Mart superstore. Stage 2 was leasing shop and restaurant/urgent care space on pad sites. Construction started only when these multi-tenant pad sites are 70 percent preleased. Now Diamond Ventures is in Stage 3, where junior anchors like TJ Maxx, Ross and Petco are now under construction with planned openings in late summer.

The Restaurant Scene

Expect several new restaurants to open, and others to expand in Tucson. Black Bear Diner is currently remodeling the former 5,500 square-foot Coco’s on Broadway across from Park Place, and will also open in the Irvington/I-19 trade area. Abuela’s Cocina Mexicana leased the former Old Pueblo Grille on North Alvernon and should open later this month. Look for Cheddar’s, Raising Cane and Kneader’s to add new sites. Other new restaurants include McAllister’s Deli, Checkers, Bisbee Breakfast Club, Lin’s Grand Buffett and Rally’s. The fast-baked pizza restaurant concept did not generate the synenergy we all thought they would, as they failed to account for the loyal customers who prefer Papa John’s, Domino’s, Pizza Hut, Little Caesar’s and Blackjack Pizza. Some of them have already closed.

Downtown Action

I also want to spend some time talking about downtown retail activity, where approximately 14,400 people now live within a mile of downtown. The downtown retail market has over 475,000 square feet of storefront space, with a vacancy rate now around 6 percent. In the past five years, over 250 new businesses have opened in the downtown area. New businesses include Caterpillar, UPS Store, MiAn Sushi & Asian Bistro, Even Steven’s, Atmosphere Interior and Arizona Daily Star ”This is Tucson.” It’s also good news that CVS is interested in the former Chicago Store building.

The 8-story hotel boutique hotel called AC by Marriott with 137 rooms and 6,000 square feet of ground level retail with a two-hundred-space parking garage will open in August. New residential projects planned in downtown include the HSL Properties’ six story La Placita Village at One S. Church with ground floor retail and 240 apartments. These new developments will create more retail opportunities in the downtown area. For 2017-2018, over 450 new homes/apartments are proposed in downtown Tucson.

MID-YEAR OUTLOOK

Look for more nontraditional shopping center tenants such as health clubs, charter schools, pawn shops, thrift stores, self-storage facilities and medical & dental care facilities to take the place of traditional retail stores.

High-visibility retail pads and end-cap shop space will command retail rates in the $30.00-$40.00 per-square-foot range in and near high-profile shopping centers.

Look for Wal-Mart, Safeway, Fry’s and Sprouts to be aggressive in the Tucson area.

On-line shopping is increasing, but “brick and mortar” is still the way to go. Amazon now has bookstores in Oregon and Washington!

Next year look for Amazon to start opening grocery stores in the Houston area and they expect to be competing with Kroger, Safeway/Albertson’s and other major grocer stores chains by 2025

Malls are reinventing themselves. Look for more open-air/entertainment areas in malls with kiosks and pop-up stores. Landlords are looking at ways to cut costs. Mall developers are becoming more creative, and some have added offices and condos to their mall properties.

A new retail center will be built on the southwest corner of Broadway/Rosemont.

A 78,848 square-foot Fry’s anchored neighborhood shopping center will be built at the southeast corner of Oracle Rd./Saddlebrooke Blvd., and is expected to open late in 2018.

Later this year, Safeway should start construction of a new grocery store in Vail and Fry’s at Houghton & 22nd Street.

A 58-acre power center developed by Bourn Partners is under construction at the northwest corner of I-19 & Irvington Road with a 50,000 square-foot Hobby Lobby as one of the anchor tenants. The site will have at least 17 pad sites! Preleasing for pad sites is underway, with tenants such as Chick-Fil-A, Chipotle, Oregano’s Pizza and Taco Bell committing.

Keep an eye on Sears which has announced that in the next year they will be closing 245 of its K-Mart and Sears stores. Macy’s and JC Penney are also closing stores. These traditional retailers did not make adjustments to keep up with the changing times and now are just trying to survive.

Look for more big-box tenants to become more flexible with their store sizes. Target has started to build 45,000 square-foot stores.

Tenants who have made adjustments and continue to be successful include Costco, Wal-Mart, QuikTrip, Safeway and Fry’s.

In 2018 a new retail development will open in Sahuarita across from the Wal-Mart, at Nogales Hwy & I-19. A 30,000 square-foot Sprouts along with Petsmart will be the anchor tenants. Sprouts has found a nitch in the Tucson area grocery store arena.

Look for small independent gas stations and convenience stores to continue to close and be redeveloped into single-tenant retail sites. Sadly, familiar restaurants will continue to close. As every new restaurant opens, it takes customers from other nearby restaurants.

Mom and Pop tenants will continue to battle with the chain stores, Amazon and road-widening projects. Look for more local tenants to close due to the competition of national chain stores and internet shopping.

The slow-going road-widening project on Grant Road from Stone to Swan Road has been hard on tenants and property owners. These property owners are in a difficult position. They don’t want to make tenant improvements as the City may want to blade their property and it’s hard to lease or sell, as they don’t really know how much land the City will “take”.

The East Broadway widening project from Euclid to Country Club was approved by the voters in 2006. It’s now 2017, so imagine owning a retail property in that area and wanting to sell it or remodel it? These projects will continue to create more vacancy due to the uncertainty of the timing of the road work and the timeframe of the City’s ability to acquire properties for road widening. It’s called condemnation blight. That said, Rio Nuevo is coming in and will make investments on Broadway to downtown. This will make that one-mile stretch known as the Sunshine Mile and, hopefully, the “next” big thing for Tucson and the continuation of downtown’s success transferred to it.

One issue we need to watch closely is our country relationship with Mexico. Mexican shoppers spend over one billion dollars a year in Pima County. A drop off in trade would have a major impact on our economy. The devaluation of the peso is already having an affect on cross border shopping.

Look for more retail activity in Marana, Vail, Sahuarita, Corona de Tucson and Oro Valley, areas where home building will be very active. Tucson’s increased population should spur new retail construction.

The Retail Market continues to improve and even better times are ahead.